What is auto enrolment?

Auto enrolment is a government initiative that requires all employers (even those who just have one member of staff) to automatically enrol certain staff into a pension scheme and make contributions towards it. Usually the staff member will also have to make contributions to the pension scheme which the government may top up with tax relief.

Auto enrolment is designed to ensure that more workers have easy access to a workplace pension scheme, enabling them to save towards their retirement and enjoy an income over and above the basic state pension.

Existing employers gradually joined the scheme between 2012 and 2018 (with bigger employers going first). All ‘new’ employers need to consider auto enrolment from day 1. Therefore auto enrolment should now be available in all workplaces.

How do I qualify for auto enrolment?

Employers must automatically enrol all staff who are:

aged 22 to state pension age (You can work out when you will reach state pension age by using the calculator on the GOV.UK website)

working in the UK – under a contract of employment (OR under a contract to provide work or services as part of someone else’s business, that you cannot delegate to someone else – such people are known as ’workers’ for employment law purposes. You can find out more about ‘workers’ on the GOV.UK website)

earning over £10,000 a year (2018/19). £10,000 a year translates into the following amounts depending on how often you are paid:

Weekly

£192

2-weekly

£384

4-weekly

£769

Monthly

£833

If or when you meet the eligibility criteria, your employer should write to you and let you know. In the letter they must tell you:

the date they have added you to the pension scheme

the type of pension scheme and who runs it

how much they will contribute and how much you will have to pay in

how you can leave the scheme if you want to

Even if you meet the eligibility criteria, in some rare instances, your employer will still not have to automatically enrol you. You can find a list of the instances when your employer does not have to automatically enrol you, on GOV.UK.

If you are self-employed in business on your own account then auto enrolment does not apply to you. However, you may still want to set up a pension scheme. You can find more information on our website.

How much will I have to contribute?

Normally, a percentage (%) of your ‘qualifying earnings’ has to be put into your pension each pay day.

Your qualifying earnings include your wages or salary, bonuses, commission as well as other items, such as statutory pay, before any tax or National Insurance contributions are deducted.

Overall total contribution required

Minimum from employer

Potential contribution from you

Up to April 2018

2%

1%

1%

Currently

5%

2%

3%

From April 2019

8%

3%

5%

There are several things you need to be aware of when looking at the figures in this table:

The percentage will apply to any qualifying earnings you have over £6,032 (for 2018/19) up to the limit of £46,350. The £6,032 and £46,350 yearly amounts translate into the following figures depending on how often you are paid:

£6,032 a year

£46,350 a year

Weekly

£116

£892

2-weekly

£232

£1,783

4-weekly

£464

£3,566

Monthly

£503

£3,863

There are examples of how the qualifying earnings thresholds work in Marcie and Richard.

Your employer can pay the minimum amount required of them, or they can choose to pay more – meaning you have to pay less (unless you want to pay more in yourself). So how much you have to pay, depends on how much your employer pays. For example, from April 2018, the minimum total contribution is 5% of which your employer must pay 2%. Instead, if your employer chose to pay the full 5%, then you would not have to pay anything (unless you wanted to). If your employer pays their minimum amount of 2%, then you must pay 3% as the overall minimum contribution is 5%.

If you do have to contribute, you will normally get tax relief to help make up your contribution – so the actual cost to you will be less than you think. There is an example below in Petro.

If the pension scheme uses a ‘relief at source’ method of tax relief, then the scheme provider is able to claim 20p in tax relief from the government on every 80p you pay in, regardless of how much you earn (this will be paid directly by the government into your pension pot). The tax relief therefore turns the percentages noted in the last column in the table above to:

Potential contribution from you

1% 0.80%

3% 2.4%

5% 4%

Some other providers use a different approach, (‘net pay arrangements’) which, generally speaking, means employees do not get any tax relief unless their earnings are more than £11,850 (in 2018/19). You should check with your employer which type of pension scheme they use. For more information about this see our separate page: ‘Do you understand how tax relief on your pension contributions works?’.

Any contributions you make will be automatically taken from your pay packet and will lead to a reduction in your take home pay. However this may mean that you are entitled to more tax credits, universal credit or other income-related benefits – more on this below. It may also reduce the amount of student loan repayments you need to make.

Most pension schemes will allow additional regular or one-off contributions to be made into your pot, over and above the minimum percentages noted in the table above.

Can I opt out of auto enrolment?

From the date you are automatically enrolled, you will have a month to choose to ‘opt out’ – contributions made during this period should be refunded. If you opt out after a month, the contributions you have already made will usually have to remain in your pension pot. Therefore if you do want to opt out, it makes sense to do this as early as possible. If you opt out, you can ask to re-join the scheme at a later date but your employer may only allow you to do this once every 12 months. Even if you do not ask to re-join, your employer will normally put you back into a scheme every three years.

You can find out more about opting out of automatic enrolment, and re-joining, on the Pensions Advisory Service website. Remember that if you opt out your employer will not make any contributions for you.

Through auto enrolment, you will be building up a pot of money for your retirement, however if you are on a limited budget, saving money may not be top priority. You can read about some of the reasons you may wish to opt out on the website of the Money Advice Service.

Where do the pension contributions go?

Your employer must choose a pension company to receive and invest all the contributions which are made. By law, this should be a good quality pension scheme - for example, one that is well run, offers value for money and protects your retirement savings. Your employer will have to give you the details of the pension company it has chosen.

The pension company will invest the contributions. Your pension ‘pot’ is separate from those of everyone else and so you will probably be able to make some decisions about where your money is invested if you want to. Any growth within the pension pot is tax-free, but the value of investments can increase or decrease.

The amount of money you have when you retire depends on how much has been paid in and how well the investments have performed. In most schemes when you retire you can take some of your pension as a tax-free lump sum. You can choose how to take the rest, for example as an income or as a further lump sum, but you may have to pay tax on it. You can find out more about your options on our website.

Once you have been auto enrolled, the pension company will write to you with a welcome pack telling you everything you need to know about being a member of their scheme and how it works, from logging into your online account for the first time (most pension companies allow you to keep track of your pension pot online) to what happens to your money if you die.

To make things easier for employers, the Government has set up a simple, low-cost ‘default’ scheme called the National Employment Savings Trusts (NEST) which employers may use if they wish. You may well end up in NEST therefore and you can find out more about it on their website.

Why have I not been automatically enrolled when I think I should have been?

It is possible for an employer to legitimately ‘postpone’ offering a pension scheme to their staff for up to three months, meaning that if you are with an employer for a very short period only, for example in a seasonal job, you might not be offered auto enrolment, even if you are otherwise eligible.

If your employer chooses to postpone you, then they should write to you and let you know. Please note that you can choose to opt in to the pension scheme during the postponement period.

If you still think that you should have been automatically enrolled into a workplace pension but have not been, ask your employer why. If you are not satisfied with the reason they give you, see ‘Problems with auto enrolment’ below.

My income varies each pay day – how will auto enrolment apply to me?

Auto enrolment applies to all employees that meet the criteria, including short-term, seasonal, temporary staff or other staff who are not on regular hours or incomes (for example fruit pickers, labourers, workers recruited in retail to cover peak periods).

Your income may vary, but if at any point, you earn more than the eligibility threshold for your pay period, your employer should auto-enrol you at that time (or after three months if they have decided to postpone you).

Once you have been enrolled, and assuming you do not opt out, your employer will then calculate pension contributions each time you are paid, in accordance with the percentage table. You should remember that the percentages only apply to qualifying earnings over £6,032 (or the appropriate amount for your pay period). If your income fluctuates, this may mean that in some pay periods you could earn enough for there to be pension contributions, and in other pay periods you will fall short and there will be none.

What if I am not currently eligible for auto enrolment?

If you do not initially meet the eligibility criteria to be automatically enrolled, you might do at some stage in the future, for example if your earnings change. If you become eligible for automatic enrolment at a later date, your employer should enrol you at that point (or after three months if they decide to postpone you).

Alternatively, you can ask to join a workplace pension scheme, even if you are not entitled to be automatically enrolled. Your employer may have to pay into it on your behalf depending on whether you are a ‘non-eligible jobholder’ or an ‘entitled worker.’

Non-eligible jobholders – for example those aged 16 to 74, earning from £6,032 (in 2018/19) to £10,000 or those aged 16 to 21 or state pension age to 74 and earning at over £10,000. You are entitled to opt in, with an employer contribution.

Entitled workers – for example those earning under £6,032 (in 2018/19). You are entitled to join a scheme but are not entitled to an employer contribution if you do so.

I have more than one job – how does auto enrolment affect me?

If you have more than one job then each of your employers will have to check whether you are eligible for that employment separately. This may mean that no employer needs to enrol you in a workplace pension scheme, although overall you may earn more than £10,000 per year.

On the other hand, you may be eligible in one but not the other, or both. If you are eligible in both, then you should be automatically enrolled in both workplace pension schemes (although you can decide to opt out). The contribution amounts involved are likely to be smaller than if you earned all your income from one job, because the first £6,032 of earnings in each employment are not included in the calculations.

What happens to my pension pot when I change jobs?

Your pension pot is entirely separate from your employment so when you leave a job your pension pot remains invested with the pension company. Your new job may use the same pension company, in which case you can continue to build your existing pot. Or your new employer may offer you a different pension scheme and you can contribute to this new scheme while the pot from your previous job remains invested as before.

It may be possible to combine the pension pots by transferring the pot from your old job into your new scheme. Before you do that you should check that both schemes will allow such transfers and what costs are involved. You can read more about transferring your pension on GOV.UK.

My employer has asked me whether I want to use a salary sacrifice scheme in conjunction with its pension scheme. What does this mean?

An employee’s pension contributions usually attract tax relief, but they do not ordinarily attract National Insurance contributions (NIC) relief. However, if an employer makes a contribution to an employee’s pension scheme, then there are no tax or NICs to pay. Because of this, a salary sacrifice arrangement is sometimes used when it comes to putting money into a pension.

As explained in our section on how much will I have to contribute, there is an overall amount of contributions that have to be paid. Your employer can pay some of this amount (meaning you also then have to pay some) or they can pay all of the amount – in which case you would have to pay nothing at all.

If your employer asks you to enter a salary sacrifice arrangement this means that you would agree to give up part of your salary in return for your employer making a larger contribution to your pension pot. If you pay National Insurance contributions on your earnings (you can check this on your payslip), normally this will save you money because the National Insurance you would be due to pay is calculated on the smaller salary. The employer would pay any employers National Insurance contributions on the smaller salary too.

I receive state benefits. If I join a pension scheme how will these be affected?

Joining a pension scheme and making contributions to it may mean that your take-home income will be reduced. But if you get a means-tested benefit like universal credit or tax credits, your pension contributions reduce the amount of income that is taken into account is assessing your award.

Universal credit for an employee is worked out using net income (i.e. income after deductions). You should not have to do anything if your employer reports your payroll information directly to HMRC as your net pay information will be passed to the Department for Work and Pensions (DWP) who will use this information to work out your universal credit award.

But for tax credits, the amount you get is assessed using gross income and, depending on how your contributions are paid out of your pay, you may need to work out some adjustment to make sure the income figure used for tax credits is after pension contributions have been taken out. For example, if your pension contributions are taken out of your pay after tax has been paid, you will need to ‘gross-up’ the amount of pension contribution to deduct that from your income figure. You can read more about this on our website www.revenuebenefits.org.uk.

I’m pregnant. What happens to my pension contributions when I’m on maternity leave?

Assuming you are already in a pension scheme before you go on maternity leave, then your own pension contributions will usually be based on the pay you actually receive, e.g. your statutory maternity pay (SMP). Your employer’s contributions will be based on your earnings before your maternity leave began. Employers are required to make contributions for the full 26-week ordinary maternity leave period. If you decide to extend your leave, the employer contributions must continue to the extent there is SMP or any other contractual income still being paid (this will usually only be up to 39 weeks).

Problems with auto enrolment

If you are concerned about the way your employer is dealing with automatic enrolment or managing your workplace pension, you can contact The Pensions Regulator using their whistleblowing service on their website: www.thepensionsregulator.org.uk

Where can I find more information?

Examples

Marcie earns £216 per week. Neither Marcie (nor her employer) pay pension contributions on the first £116 of pay, thus they will each pay contributions based on £100 (£216 less £116) each week.

Richard

Richard (and his employer) normally pay pension contributions each month based on his salary of £2,500 (this means they actually only pay them on £1,997 as they do not pay them on the first £503 of pay). In one month, though, he has to work a lot of overtime because a colleague is ill and is paid an extra £1,500. That means he is paid £4,000 that month. No pension contributions are due on the amount he has earned below £503 or in excess of £3,863. Richard and his employer will each pay pension contributions on £3,360 that month.

Petro

Petro (and his employer) pay pension contributions each month based on his salary of £1,500. The first £503 of this is not counted so they each have to pay contributions based on £997 each month. From 6 April 2018, Petro will have to contribute 3% of that pay, assuming his employer pays the minimum contribution of 2%. The contribution Petro needs to pay is £29.91 per month. But the government pays part of that by giving him 20% tax relief on the amount he pays (£5.98). The actual cost to him is £23.93, but the full £29.91 goes into his pension pot, together with the sum paid by his employer, another £19.94.